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Financial planning can help you decide when to claim Social Security benefits.
An article from Fidelity Investments.
Key takeaways
- Social Security is an important part of retirement income for many people, but it can be hard to know when to claim your benefits.
- Monthly benefits change based on the age when you claim. If you claim early, your benefits are reduced. If you delay you can get a higher monthly benefit.
- The financial planning process can help you clarify the potential impact of different claiming strategies.
For most of your working life, the idea of taking Social Security may seem so far off that it’s not very realistic. But as you approach your 60s, your options begin to come into focus. If you qualify, you can start taking payments as early as age 62 or you can delay until as late as 70. The longer you wait the higher your monthly payment will be.
For each year you claim before your full retirement age (FRA), your benefit will be reduced. If you start taking Social Security at age 62, rather than waiting until your FRA, you can expect up to a 30% reduction in monthly benefits. FRA now ranges from 66 to 67, depending on your date of birth.* Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay past your FRA, you get an 8% increase in your benefit.
Social Security payments are a lifetime benefit and the current rules say those payments will go up with inflation, so your decision can have a long-term impact on your financial situation. But delaying means you may need to work longer or fund the early part of your retirement from other sources. When to claim Social Security is one of the first big decisions many people make about retirement. How can you decide?
Working with a financial professional can help to illustrate the trade-offs involved with different claiming strategies and how your choice might impact your retirement over the long term.
To see how the financial planning process might illustrate the trade-offs, let’s look at a hypothetical couple. Of course, this is just one example and Social Security isn’t just about the age you claim. Being single, married, or divorced can play into your decision as well as other factors.
The Trade-offs
Arnold and Larissa recently turned 60 and they decided it was time to come up with a plan for Social Security. The couple is debating when to take Social Security—they could claim when they plan to retire at age 63. But they know that their monthly benefit would increase if they delay, so they’d like to see what waiting until age 70 might mean for their finances overall.
The Goals
The couple wants a retirement plan that will enable them to maintain their current active lifestyle and they want to retire on the earlier side, so they can travel and enjoy time with their adult children and new grandchildren. They hope to be able to leave a legacy that will help provide for their family after they are gone. Arnold’s family has a history of some health conditions, so he wants to take advantage of his time but also be very confident that their retirement plan will provide a long retirement for Larissa.
The couple sets a goal of planning for Arnold to live until 93 and Larissa until age 96, so despite their health concerns about Arnold’s family health history, they will both be prepared for the possibility of a long retirement.
The Checkup
Arnold and Larissa have had long careers and slowly but surely built up their savings, Larissa has saved more than $500,000 in her workplace savings plan and Arnold has about $360,000 in his, and their joint savings is another $130,000. In addition, the couple has a home worth about $500,000, though they still carry a $200,000 mortgage.
The Options
To compare the impact of when they claim their benefits, their financial advisor uses an investment tool that runs 1,000 different hypothetical scenarios using their projected expenses and a range of different simulated market scenarios. Since it’s impossible to predict the actual return of the markets, the goal is to look at lots of different possible outcomes and create a plan that will work even in challenging market conditions.
First, they consider the illustrations if they claim their benefits when they retire at age 63. The illustrations suggest the couple would have a moderate chance of maintaining their lifestyle until age 96, meaning the plan succeeded in about 80% of the scenarios. In an average market, meaning the middle outcome of the 1,000 projections, they could potentially leave a legacy of about $2.3 million. (See Median results in the chart.) Of course, sometimes markets are below average. In about 20% of the scenarios, the couple would need to cut spending or make other lifestyle changes to avoid running out of money in their portfolio. And in a very challenging market (defined as the worst 2.5% of scenarios), the couple could have spent all their savings and be $680,000 short of their estimated expenses. (See Downside results in the chart.)
If they retire at 63 but wait to claim benefits until age 70, the couple’s monthly benefit will be higher, but they will need to fund the first 7 years of their retirement from their savings. Still, the illustrations suggest that a higher guaranteed monthly payment starting at age 70 increased the chances of their plan succeeding—the projected value of their portfolio assets might let the couple maintain their current lifestyle throughout their retirement in more than 90% of the hypothetical scenarios. Even in a very challenging market, defined as the worst 2.5% of scenarios, the illustrations suggest that delaying benefits improved their position, reducing the difference between their estimated expenses and the projected values of their portfolio assets to roughly $240,000.
In this particular hypothetical scenario with challenging markets, having a higher monthly benefit made a significant difference.
Decision Time
Arnold and Larissa review the numbers and consider the trade-offs. They discuss some other options, like additional claiming strategies, downsizing their home, working a few additional years, or relocating. But Arnold and Larissa really want to stop working while they are young enough to enjoy their retirement—and really want to have confidence in their plan. They decide to delay claiming until 70, but still retire at 63.
The Power of Planning
Deciding when to claim Social Security can be even more complicated for some couples who may want to consider spousal benefits or have other options. But working through a holistic planning process that takes into account your goals and overall financial picture can help you make an informed choice.
The scenario analysis depicted in this story uses Monte Carlo analysis, which is based on a mathematical modeling process that attempts to take into account the changing and uncertain nature of the markets to evaluate the likelihood of certain outcomes under various market conditions and presents a probability of success, i.e., an estimate of the probability that a minimum amount of assets is achieved at the end of the simulated period (investment horizon). Monte Carlo analysis use estimates of asset class expected rates of return, and expected volatility and correlation, to model an asset allocation (each a simulation). In each simulation, a rate of return is generated for each asset class using the mean and standard deviation of the market index in the randomly chosen year. Up to 1,000 trial runs are calculated resulting in a range of values that is further analyzed to produce a statistical probability (i.e., the probability of success) of an investment strategy.
The percentile indicates the rank of the scenarios among the 1,000 simulations. So, 50% of scenarios outperformed the median and 50% underperformed. This article refers to a median market as “average”. The downside shows the scenario in the worst 2.5% of scenarios, 97.5% performed better. The probability of success is based on the percentage of market scenarios in which the plan funded the income needs to the planning age. The Social Security scenarios reflect claiming at age 63, with each spouse claiming an annual retirement benefit of $20,000 indexed for inflation. The second scenario uses the same retirement date but the couple delays claiming benefits until age 70 and collects $33,000 each, per year, indexed to inflation at an assumed rate of 2.5%.
The scenarios modeled assumed that the couple qualified for the residential home sale tax exemption and that the costs of their housing-related expenses would increase at 4% annually throughout the course of the plan.This information is intended to be educational and is not tailored to the investment needs of any specific investor.